What's happening?
We are hearing reports that where a parent applies for the free childcare to which they are entitled that this is then automatically ending their UC or Tax Credit award.
This is probably wrong and needs to be challenged.
Parents with pre-school children aged 3 or 4 can get up to 30 hours a week childcare free of charge. Obviously they cannot claim additional money in their UC or Tax Credits to help pay for this childcare as they are not paying for it, and there will be a small number of cases where the reduction in childcare costs may mean that they are no longer entitled to UC or Tax Credits.
However the DWP / HMRC seem to be taking a blanket approach and ending a UC / Tax Credit award whenever a parent applies for free childcare regardless of whether there would be an ongoing entitlement.
Why is this happening?
The confusion arises because neither UC nor Tax Credits (ie both Child and Working Tax Credit) can be paid if the claimant has registered for the Tax Free Childcare Scheme. But this is an entirely different scheme which is targeted at higher earners. The scheme can give up to £500 every 3 months (up to £2,000 a year) for each child to help with the costs of childcare; increasing to £1,000 every 3 months for a disabled child.
It may be that DWP and HMRC are misunderstanding the rules, or it could be a feature of the online application process for the free childcare. Because someone could be eligible for both 30 hours’ free childcare and for the Tax Free Childcare Scheme, when they apply online they are checked for eligibility for both.
Both the “Apply for Tax Free Childcare” and “Apply for 30 hours free childcare” pages state:
“There's one application for Tax-Free Childcare and 30 hours free childcare. As part of your application, you will find out if you can get both.“
So it maybe that applicants are recorded as claiming both! And if the applicant declares that they receive Tax Credits the form goes on to ask them if they want to end their Tax Credits.
"Do you want to stop your tax credits to get Tax-Free Childcare? You cannot use Tax-Free Childcare and tax credits together. If your application is successful, your tax credits will stop straight away.
This will cause a break in your benefits. You may not be able to restart your tax credits because they are likely to have been replaced by Universal Credit."
So someone might answer "Yes" in error.
If the applicant answers "No" they are advised to inform HMRC so that they don't receive help through Tax Credits for the childcare costs.
It may be at this point that HMRC mistakenly refuses the Tax Credits.
And the same could happen with the DWP, when a UC claimant notifies them that they have registered for free childcare.
What should they do?
Where someone is on UC and starts receiving free childcare and their UC is stopped they must challenge the DWP with a mandatory reconsideration, explaining that they are not on the Tax Free Childcare Scheme. nor did they chose to register for it.
Likewise where someone is receiving free childcare, claims UC, and is refused, they need to challenge this.
Where someone is getting Tax Credits and starts receiving free childcare, and their Tax Credit is ended, they must request a mandatory reconsideration from HMRC- they can do this online- explaining that they are not on the Tax Free Childcare Scheme.
But they must be careful not to immediately claim UC to replace their lost income as, if they do, their other legacy benefits will end and they will not be able to return (the ‘lobster pot’). They should seek advice first and check if they would be better off on UC than on
legacy benefits with their Tax Credits reinstated – there are a few circumstances when they could be better off on UC but many would be worse off.
And where someone is receiving free childcare, claims Working Tax Credit*, and is refused, they need to challenge this.
*This will only be possible where they are already receiving Child Tax Credit or ‘is protected by the 'SDP Gateway’ – only applicable up til 27th January 2021.
More on the various Childcare Schemes on this page. NOTE: that people who are working but still with some entitlement to benefits need to take advice before registering for a tax free childcare account because some people are better off not using the service and staying on in-work benefits instead.